Past-Due Ginnie Mae Loans Bought Early to Cut Losses

A recent survey indicates that most large mortgage lenders are buying delinquent government loans early in the foreclosure process in order to stem losses.

The survey, conducted by Price Waterhouse LLP, found that nine large mortgage banks have an early pool buyout program for Government National Mortgage Association, or Ginnie Mae, loans.

Buying the loans lets servicers accrue interest that is paid by the Department of Housing and Urban Development or Veterans Administration. This interest generates income to offset some of the costs of foreclosure.

Some industry observers said that through this practice companies can actually post gains from foreclosure processing, according to a summary of the survey.

But Richard D. Altham, manager of Price Waterhouse's mortgage banking services group, wrote in the summary that it would be difficult for companies to record such gains because several risks are incurred in buying loans early in foreclosure.

A servicer does not get the full amount of interest on early pool buyouts until a claim is settled. So if the delinquent loan becomes current instead of going into foreclosure, the servicer becomes subject to the interest rate risk associated with having the loan in its portfolio.

"All servicers who employ early pool buyout programs run the risk of the loan reinstating and becoming a portfolio loan, which cannot be easily repackaged as a security," Mr. Altham wrote.

In recognition of this, six of the servicers surveyed said they wait for loans to become 120 days delinquent before buying them. Four of the servicers said they wait 180 days. When the loans are delinquent for such a long period, there is less chance that they will become current.

Mr. Altham wrote that another risk involved in early pool buyouts is that the costs to fund such a buyout are typically large and must be financed with short-term debt. So larger bank-owned mortgage companies that have lower funding costs would benefit more from these buyouts than smaller independent mortgage companies.

In order to maximize the income generated from these buyouts, some companies have set specific targets for loan purchases.

Two said they have minimum return on equity goals for loans they buy. Two other companies said they look at what the rate is to fund a purchase of loans and then only buy loans with rates higher than the funding rate.

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